[FAQs] Computation of Gross Receipts/Turnover | Tax Audit | A.Y.

2023-24
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[FAQs] Computation of Gross Receipts/Turnover | Tax Audit | A.Y. 2023-24

Taxmann in Account & AuditBlogTax Audit Week On January 7, 2022, 5:53 pm

FAQ 1. How to calculate the gross receipt or sales turnover for a tax audit?
Applicability of tax audit under section 44AB depends upon gross receipts, sales, or turnover
of an assessee, so the first and foremost thing is their calculations.

1. Sales turnover

As per ‘Guidance Note on Terms Used in Financial Statement’ published by the ICAI, the
meaning of the term’ sale turnover’ shall be aggregate of amount for which sales are affected
by an enterprise. The terms gross turnover and net turnover are sometimes used to
differentiate the turnover before and after deduction of returns and discounts.

An invoice may involve various extra and ancillary charges. Some of these charges may form
part of the sale turnover whereas some may be excluded while determining the value of sales
turnover. The treatment thereof is explained in the below table.

Particular Treatment

To be excluded from sales turnover if discounts

Trade discount or turnover discount
are allowed in the sales invoice

Cash discount Not to be excluded from sales turnover

To be excluded from sales turnover if it is in the

nature of trade discount. If it is in the nature of
Special Rebates
commission on sales, the same cannot be
deducted from the figure of turnover.

Commission on sales Not to be excluded from sales turnover

Sales return To be excluded from sales turnover

Sale proceeds from the transfer of fixed assets To be excluded from sales turnover

Sale proceeds of property held as an investment To be excluded from sales turnover

Sale proceeds from the transfer of securities

Not to be excluded from sales turnover
held as stock-in-trade

To be excluded from sales turnover unless the

Scrap assessee is engaged in the business of dealing
in scrap.

2. Gross receipt

The term ‘Gross Receipts’ is not defined in the Income-tax Act. The ‘Guidance Note on Tax
Audit’ issued by ICAI provides that in the case of professionals, ‘Gross receipts’ include all
receipts arising from carrying on a profession. However, certain receipts may or may not be
included in the gross receipts.

The following receipts shall be included in the gross receipts:

 Out-of-pocket expenses, recovered by way of consolidated fees, would form part of gross
receipts.

Cash assistance (by whatever name called) received or receivable by any person against
exports under any scheme of government.

Any duty drawback is payable to any person against exports under specified schemes.

The aggregate gross interest income received by a money lender, commission, brokerage,
service, and other incidental charges received in the business of chit funds.

Reimbursement of expenses incurred (i.e., packing, forwarding, freight, insurance,

travelling, etc.). However, if the same is credited to a separate account in books, only the
net surplus on this account should be added to gross receipts or turnover.

Hire charges of cold storage.

Liquidated damages.

Insurance claims, except those which are linked with fixed assets.

Sale proceeds of scrap, wastage, etc., unless treated as part of sale turnover, whether or
not credited to a miscellaneous income account.

Lease rent in the business of operating lease.

Finance income to reimburse and reward the lessor for his investment and services.

Hire charges and installments received in the course of hire purchase.

Advance received and forfeited from customers.

The value of any benefit or perquisite, whether convertible into money or not, arising from
business or exercise of a profession.

Following receipts shall be excluded from the gross receipts:

Out-of-pocket expenses recovered separately from the client shall not form part of gross
receipts.

Where a professional receives an advance for services that are yet to be rendered, it will
not form part of the gross receipts till the services are rendered.

Sale proceeds of fixed assets, including advance forfeited, if any.

Sale proceeds of assets held as investments.

Rental income unless the same is assessable as business income.

Dividends on shares except in the case of an assessee dealing in shares.

 Income by way of interest unless assessable as business income.

Reimbursement of customs duty and other charges collected by a clearing agent.

The amount received by travel agents from clients for payment to airlines, railways, etc., is
excluded if received by way of reimbursement of expenses incurred on behalf of the client.
If, however, the travel agent is conducting a package tour and charges a consolidated sum
for transportation, boarding and lodging and other facilities, then the amount received
from the members of the group tour should form part of gross receipts.

The amount of advertising charges recovered by an advertising agent from his clients by
way of reimbursement shall be excluded. However, if he books the advertisement space in
bulk and recovers the charges from different clients, the amount recovered by him will
form part of his gross receipts.

Share of profit of a partner in the total income of the firm shall be excluded from the total
income of the partner.

Write back amounts payable to creditors or provisions for expenses or taxes no longer
required.

In case of sale by a commission agent or by a person on a consignment basis, if the property

in goods or all significant risks and rewards of ownership of goods continue to belong to the
principal, the relevant sale price shall not be part of the turnover of the commission agent. In
this case, the turnover shall be the amount of commission earned by the agent. However, if
the property in the goods, significant risk and reward of ownership belongs to the commission
agent, the sale price received/receivable shall form part of his turnover.

Read More Sales Turnover or Gross Receipts

FAQ 2. Whether the out-of-pocket expenses received by professionals shall

form part of gross receipts?

The expression “gross receipts” in the profession would include all receipts arising from
carrying on of such profession. Generally, professionals like solicitors, advocates or chartered
accountants receive out-of-pocket expenses in advance and credit it in a separate client’s
account to utilise them for making payments for stamp duties, registration fees, travelling
expenses, etc., on behalf of the clients. These amounts, if collected separately in advance or
otherwise, should not form part of the “gross receipts”. If, however, such out-of-pocket
expenses are collected by way of a consolidated fee, the whole of the amount so collected
shall form part of gross receipts, and no adjustment shall be made in respect of actual
expenses paid on behalf of his clients out of the gross fees so collected.
Furthermore, the advance fees received for which services are yet to be rendered will not form
part of the receipts, as such advances are the liabilities of the assessee and cannot be treated
as his receipts till the services are rendered.

FAQ 3. How to calculate the turnover of the commission agent?

Turnover of a commission agent or a person selling goods on a consignment basis is

determined based on the transfer of significant risk or reward of ownership. If the property in
goods or all significant risks and rewards of ownership of goods continue to belong to the
principal, the relevant sale price shall not form part of the turnover of the commission agent.
In this case, the turnover shall be the amount of commission earned by the agent. However, if
the property in the goods, significant risk, and reward of ownership belongs to the
commission agent, the sale price received/receivable shall form part of his turnover.

ICDS-IV (Revenue Recognition) also provides that in the case of an agency relationship, the
revenue of an agent shall be the amount of commission and not the gross inflow of cash,
receivables or other consideration. The CBDT1 has also clarified that while determining the
turnover in case of Kachha Arahtias, the turnover does not include the sales effected on
behalf of the principals and only the gross commission has to be considered. However, in the
case of Pucca Arahtias, the total sales/turnover of the business should be taken into
consideration.

FAQ 4. How to calculate the turnover of a share broker?

When a share broker purchases securities on behalf of his customers, he does not get them
transferred in his name, but they are delivered in the name of the customer. The same is true
in the case of sales. The share broker holds the delivery merely on behalf of his customer. The
property in securities does not get transferred to the share-brokers. Only brokerage, which is
being accounted for in the books of share brokers, should be considered for calculating the
turnover. However, in the case of transactions entered into by a share broker on his personal
account, the sale value should be considered while calculating the sales turnover. The case of
a sub-broker is not different from that of a share broker.
FAQ 5. How to calculate the turnover in case of a speculative transaction?

A ‘speculative transaction’ means a transaction in which a contract for the purchase or sale of
any commodity or securities is periodically or ultimately settled otherwise than by the actual
delivery or transfer of commodity or scrips. Thus, in speculative transactions, both positive
and negative differences can arise from the settlement of contracts. Each transaction,
whether resulting in a positive or negative difference, is an independent transaction. In such
transactions, though the contract notes are issued for the full value of the purchased or sold
asset, the entries in the books of account are made only for the differences. Accordingly, the
aggregate of both positive and negative differences is considered as the turnover.

For example, Mr X is an assessee engaged in speculative business. He derives the following

profits or losses while dealing in securities:

Securities Amount of gain or (loss)

A 15,000

B (24,000)

C (14,200)

D 16,000

Total 69,200
While computing the turnover of Mr X, all the differences, whether positive or negative, shall
be aggregated.

FAQ 6. How to calculate the turnover in the case of derivatives?

The Income-tax Act does not contain any provision or guidance for the computation of
turnover in F&O trading. However, the Guidance Note on Tax Audit issued by the ICAI
prescribes the method of determining turnover, which shall be as follows:

(a) The total of favourable and unfavourable differences is taken as turnover.

(b) Premium received on the sale of options is included in turnover. However, where the
premium received is included for determining net profit for transactions, the same should not
be included separately.

(c) In respect of any reverse trades, the difference thereon should also form part of the
turnover.

All the favourable or unfavourable differences are aggregated to calculate the turnover.

For example, Mr A enters into the following transaction during the financial year:

Premium
Security name Type Buy Amount Sell Amount Profit/(Loss)
received

Cipla Futures – 7,47,500 8,05,000 57,500

Nifty Call – 3,375 6,000 2,625

BHEL Call – 41,600 20,800 (20,800)

ONGC Futures – 3,48,500 3,28,000 (20,500)

IOC Put (Sell) 500 – – 500

4,000 (Square Off

ITC Put (Sell) 1,000 – (3,000)
Price)

Reliance Ltd. Put – 4,500 2,500 (2,000)

In derivative transactions, the aggregate of both favourable and unfavourable differences (i.e.,
income and loss) is considered as the turnover. Further, the premium received on the sale of
options is also included in turnover if the same is not included while determining the net profit
or loss from the transaction. Thus, the turnover of Mr A shall be as follows:

Security Name Profit/(Loss)

 Cipla 57,500

Nifty 2,625

BHEL (20,800)

ONGC (20,500)

IOC 500

ITC* (3,000)

Reliance Ltd. (2,000)

Total Turnover 1,06,925

* As the amount of premium received is already considered for computing the profit or loss from the transaction, it is not included
again while computing the turnover.

FAQ 7. How to calculate turnover in the case of multiple businesses?

Where an assessee is carrying on more than one business, sale turnover or gross receipts
from all businesses shall be clubbed together. However, if the assessee is opting for the
presumptive taxation scheme, the turnover of such businesses shall be excluded while
determining his total sales turnover or gross receipts.
FAQ 8. How to check the threshold limit if the assessee is carrying on
business and profession at the same time?

The ICAI, in the guidance note on tax audit, provides that if an assessee is carrying on a
business and a profession, then a tax audit is required if turnover/receipts from either
business or profession exceed the prescribed threshold limit.

For example, the professional receipts of an assessee are Rs. 54 lakhs and the total turnover
from the business is Rs. 72 lakhs. It will be necessary for him to get the accounts of the
profession and business audited because the gross receipts from the profession exceed Rs.
50 Lakhs.

Similarly, if the professional receipts are Rs. 42 lakhs and total turnover from business are Rs.
86 lakh. In this circumstance, as the gross receipt or turnover from a profession or business
does not exceed the limits specified in Section 44AB, there is no need to conduct a tax audit.

FAQ 9. Whether GST shall be included while calculating the gross turnover
or receipt?

Section 145A provides for the inclusion of taxes, cess, etc., in the value of sale, purchase, and
inventory. However, the purpose of this provision is limited to the calculation of income
taxable under the head ‘Profits and Gains from Business or Profession’. Whether this
provision can be applied to calculate ‘sales turnover’ for Section 44AA, Section 44AB, Section
44AD, and Section 44ADA has always been a matter of disagreement between the revenue
and taxpayer.

Where an assessee has opted for the Composition Scheme under the GST Act, the tax is not
recovered from the customer and is debited to the statement of profit & loss as an indirect
expense. Thus, the amount of GST paid by an assessee does not form part of his gross
turnover. In the case of other assessees, as GST is charged from the customer and is
recognised separately in the books of accounts, it is not clear whether the amount of GST
shall be included in the turnover for calculation of taxable income only (as provided by Section
145A) or for every other provision which has a reference to ‘turnover’. Unless the CBDT
clarifies its stand on this matter, it would be appropriate to ignore the amount of GST while
calculating the gross turnover or gross receipts for the following reasons:

Section 145A begins with ‘for the purpose of determining the income chargeable under the
head Profits and gains of business or profession’, which makes this provision inapplicable
for other purposes.
 If GST recovered from the customer is credited to Current Liability Accounts (Output CGST,
Output IGST, or Output SGST) and payments to the authority are also debited to the said
separate account, these should not form part of the turnover shown in profit and loss
account. ICAI’s Guidance Note on Tax Audit also confirms that if tax recovered is credited
to a separate account, they would not be included in the turnover.

The inclusion of GST in the turnover would have a cascading effect, as presumptive
income would be computed on the component of GST, which is never treated as income of
the assessee.

(For detailed analysis and illustrations on the valuation of sale, purchase, and inventory, refer
to ‘Treatment of Tax paid on Goods (Inclusive v. Exclusive Approach)’)

Read More ‘Treatment of Tax paid on Goods (Inclusive v. Exclusive Approach)’

FAQ 10. Mr A, a partner in a firm, has obtained a remuneration of Rs. 12

crores from the firm during the FY 2022-23. Is it mandatory for Mr A to get
the accounts audited since the remuneration received from a firm exceeds
the specified limit?

Any interest, salary, bonus, commission or remuneration due to or received by a partner from
the firm is taxable as his business income under Section 28(v) provided such payments were
deducted while computing taxable profits of the firm. The Bombay High Court, in the case of
Perizad Zorabian Irani v. PCIT [2022] 139 taxmann.com 164 (Bombay), held that if the
assessee was only a partner in a partnership firm and was not carrying on any business
independently, remuneration received by the assessee from said partnership firm could not be
treated as gross receipts of assessee and, accordingly, assessee was justified in not getting
the accounts audited under section 44AB with respect to such remuneration.

The Madras High Court, in the case of Anand Kumar v. ACIT [2020] 122 taxmann.com 252
(Madras), also held that remuneration and interest received by the individual assessee from
the partnership firm could not be termed to be a turnover of the assessee.
Based on the above case laws, it can be opined that Mr A is not engaged in independent
business activities and is merely a partner in a business conducted by the firm. Consequently,
his remuneration from the partnership firm should not be classified as gross receipts or
turnover. Hence, he shall not be subject to audit under Section 44AB.

1. Circular No. 452 dated March 17, 1986

Dive Deeper:
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[FAQs] Due Date & Process to File Tax Audit Report | A.Y. 2023-24
[FAQs] Disclosures & Reporting in Form 3CD | Tax Audit | A.Y. 2023-24
[FAQs] Income Computation & Disclosure Standards (ICDS) | Tax Audit | A.Y. 2023-24
[FAQs] Method of Accounting, GST & Ind AS under Tax Audit | A.Y. 2023-24

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